Known, Unknowns, and Options for Nonprofits on the Overtime Final Rule

In the lead-up to the release of the new Labor Department overtime regulations on May 18, we heard from many nonprofits that they had moral support for raising the salary threshold, but operational anxiety as they worried about how to cover any increased costs. Now that the Final Rule has been issued, individual nonprofits are going to have to confront some certainty, recognize that not all is easily known, and consider important options before the final rule takes effect on December 1.

Known

It’s about to cost more to deliver on nonprofit missions and impact. The new overtime rule expands the number of employees who must be paid overtime under the federal wage and hour law by raising the salary threshold from below the poverty level to nearly $47,500 per year.

Unknowns

The most immediate unknown relates to coverage of the law. It’s not a new query, just one that many nonprofits have never asked before. Which nonprofits are covered by the new overtime rule is a simple question with a complicated answer for each nonprofit, and depends on where your employees perform their duties, the nature of your revenues, and the work that individual employees perform. In ten states and the District of Columbia, the overtime rule will apply to virtually every nonprofit employer and employee because their state laws incorporate the DOL regulations into state law. In all other states, nonprofit employers must calculate whether their commercial activities exceed $500,000 and trigger “enterprise coverage.” And even if not, some nonprofit employees are entitled to “individual coverage” when their work activities cause them to engage in interstate commerce. Neither of those tests – enterprise or individual coverage – is clear or well-understood as they apply to nonprofits. The Labor Department made a valiant effort to provide some insights, but this remains a gray area in the law.

It is also unknown where any extra money will come from to pay for increased costs. In its overview document, Overtime Final Rule and the Non-Profit Sector, the Labor Department acknowledged the unique challenges to “nonprofit organizations for which some or a significant amount of funding comes from government or private grants of set amounts.” The Department revealed that it “is working to inform government and private funders of the Overtime Final Rule to encourage consideration of the changes effected by the rule and potential impact on non-profit grantees.” How foundations will respond to those overtures is anyone’s guess.

Options

And this brings nonprofits to the point of making some decisions. From what we can tell, there are – at least theoretically – three main options, three paths to follow, in the coming months for dealing with the Overtime Final Rule.

1. Ignore it. Nonprofits could simply do nothing and hope that no one complains. Perhaps some may think it safe to assume that the mission and good will of the organization puts it above reproach. However, that strategy, or lack of one, ignores reality. The Labor Department has a robust enforcement operation and is in the business of litigating on behalf of workers. Further, the Fair Labor Standards Act (FLSA) allows private enforcement lawsuits, meaning that individuals can sue to protect their rights.

Bottom Line: Nonprofits ignore the overtime rule at their peril.

2. Fight it. Alternatively, nonprofits can take direct opposition by joining many in the business community in fighting to prevent the regulations from taking effect. Three tactics are available to Congress to block the new regulations: (1) adopting a resolution of disapproval under the Congressional Review Act; (2) enacting specific legislation, such as the Protecting Workplace Advancement and Opportunity Act (S. 2707 and H.R. 4773), which would nullify the proposed rule, among other things; or (3) attaching a rider to an appropriations bill to block enforcement of the rule for a year. All three actions require either the President’s approval (which is unlikely, given that the proposed rules are coming from his Administration) or sufficient votes (two-thirds of both the House and Senate) to override his expected veto.

Bottom Line: The odds are low that Congress will prevent the overtime rule from going into effect.

3. Deal with it. Love it or hate it, the Overtime Final Rule will be the law of the land come December. Dealing with it entails several action items.

Consider your internal deadlines immediately rather than waiting for December 1. Nonprofits with budget years ending on June 30 will need to develop new budgets for the fiscal year beginning in six weeks that take these new changes into account. Nonprofits with budget years ending on December 31 have more time to adjust and plan for 2017.

Determine whether your nonprofit is covered. A good place to start for general answers is your state associations of nonprofits. But in many cases, your nonprofit may need to consult local legal counsel in every state where it has employees. Be sure counsel is well versed not only in wage and hour law, but also in nonprofit law, culture, and operations.

The higher salary threshold in the Final Rule means that employers must decide whether to raise an individual’s pay at least to the new minimum salary or pay her or him overtime for hours in excess of 40 each week. Other options include reassigning job duties, reducing staffing, limiting services, altering benefits packages, and more. The DOL compliance guidance offers some suggestions.

Every labor lawyer will tell you that compliance will require a review of all or most job descriptions and duties. The changing circumstances raised by the new regulations is an excellent reason to conduct an employment audit and get rid of old job duties and restrictions, and craft new ways of doing things that are efficient, compliant, and mission oriented.

Finally, there is the option of raising new money to cover the new costs. It is possible to attract transition grants from foundations and other sources, as CalNonprofits promoted in 2015 after California adopted hikes in the state minimum wage. More directly, nonprofits performing services on behalf of governments pursuant to grants and contracts should explore the possibility of negotiating an equitable adjustment to existing grants and contracts to accommodate the increased costs mandated by the new overtime regulations. That may entail tough choices about limiting services, but negotiations could also result in receipt of increased payments. This certainly is not a time for nonprofits to be shy about going to government partners and presenting the case for appropriate adjustments. In preparation, we urge all nonprofits with government grants and contracts to learn more about the grants reforms known as the OMB Uniform Guidance – there’s more money for your indirect costs than in the past.

Bottom Line: A nonprofit’s mission and bottom line may collide as the DOL Overtime Final Rule takes effect, but all stakeholders are best served by dealing with the transition sooner than later.